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Back to the future of scrap

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Is it 2008 again? For ferrous scrap prices it almost looks like, as Yankee catcher Yogi Berra once said, déjà vu all over again. The steady climb over the past few months might make some believe that.

Ferrous scrap prices rocketed to as high as $500 per long ton. That may not match the $900-per-ton figure that prevailed for a brief period two-and-a-half years ago, before the market came crashing down at year's end. However, at that time it was factory bundles and other prime grades of industrial steel scrap that were racing ahead of the pack—in some instances by as much as $400 per ton. That's not the case now. If anything, the secondary grades are close on the heels of industrial steel scrap tags. No. 1 heavy melt was quoted at $440 per ton in key steelmaking cities like Chicago, Cleveland and Pittsburgh in January, with prices paid for shredded scrap ranging from about $450 to $480 per ton in most regions. There wasn't much of a price differential between shredded and No. 1 busheling in January—no more than $10 or $20 per ton in most regions—which some veteran brokers and dealers saw as a little odd, given the better yield melt shops normally get when using busheling instead of shredded.

The price pattern through the latter part of 2010 was unlike the madness that characterized the market in 2008. For one thing, a harsh winter has discouraged peddlers and dealers from going out and scouring the countryside for old iron pipe and steel scrap. Major scrap processors that handle much of the so-called retail trade were reporting a slow flow into their yards.

Second, there are few big demolition jobs, and that's not just because of the season. There haven't been many for the past year or two, and such jobs are even slower now that the cold weather has arrived. And lastly, perhaps, is the federal government's "Cash for Clunkers" program; while it helped automakers unload some of their excess inventories of new vehicles, it also drained a lot of junk cars off the market.

At the same time, demand for new steel products has rebounded, both in the United States and overseas. Housing and appliance markets might still be weak, but the auto industry and their suppliers are more active than they had been in the past year.

Ferrous scrap demand from overseas also is strong. Prices as high as $550 per tonne were being paid in both Turkey and the Far East, bringing strong price pressures to bear on domestic steelmakers. Export yards on the East Coast were quoting $410 to $420 per ton for No. 1 heavy melt from local suppliers, but they also were wooing yards in western Pennsylvania and eastern Ohio with offers of $450 per ton. Part of that premium covered the higher freight costs to the coast, but it also served to draw material away from steel mills in those regions.

It's an expensive new world for ferrous scrap consumers. There's nothing new about that. What is surprising, though, is the tenacity that many foreign mills display in their efforts to get enough raw material.

The domestic steel industry's modest specifications for a catch-all grade like No. 1 heavy melt don't apply to the export trade. Some dealers joke that they only have two requirements to fulfill for foreign mills Does its stick to a magnet and does it sink in water?

And there's a new twist on the "Cash or Clunkers" program. Call it "Clunkers for China." Some West Coast auto wreckers are flattening vehicles and loading them into seaborne containers for export. One auto wrecker figures that a junkyard can get from six to eight crushed hulks in a 20-foot container. The Chinese have been building new megashredders in the past few years. Demolition work there has been feeding these monsters, but now it appears they have an appetite for old vehicles, which an emerging economy like China lacks.

Many domestic mills now find that not only are they competing against each other in their efforts to buy scrap each month, but also their foreign rivals. They have to figure out how to do that without agreeing to take scrap that is too thick and slows down the tap-to-tap time, and thus the economics of steel production. Or should they take in sealed units that might contain toxic materials like mercury or polychlorinated biphenyls that will contaminate a heat?

That could be the reason why we're likely to see more steel mills in the market for scrap companies in the not-too-distant future. Steel Dynamics Inc., Fort Wayne, Ind., gobbled up OmniSource Corp., and Nucor Corp., Charlotte, N.C., married its longtime partner David J. Joseph Co. Even Timken Co., which has a massive shredder next door to its Canton, Ohio, mill, has bought a couple of mid-sized Ohio scrapyards in the past year. Are there other targets?

The simple explanation is that this might be the only way that some electric furnace mills will be able to ensure their scrap supplies in the future. Their older brethren, the integrated steel mills, had no such worries about raw material supplies in the past, and even these days, because they either owned the iron mines or had long-term contracts with those they didn't own.

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